Hedge funds open to cash/bonds solution

An image of the ad published yesterday in the Wall Street Journal.

Argentina published an ad in the Wall Street Journal ratifying its pro-negotiation stand

NEW YORK — Argentina may hyperventilate about greedy hedge funds right up to and past the point of another default on US$100 billion of bonds, but posturing and talk won’t stop events beyond its control from forcing a settlement with holdout bondholders, whether it’s next week, next month or next year, experts said.

Faced with dwindling foreign exchange reserves, a US$6 billion principal and interest payment on another bond that matures next year, the nation can’t risk closing the door on access to international capital markets to solve a coming cash crunch and a potentially even bigger default.

Considering that, Argentina may send a team of government officials to New York to meet with holdout bondholders. President Cristina Fernández de Kirchner said Friday her government is ready to sit down with all of its creditors and be “part of a just negotiation.”

“I have given instructions to our Economy Ministry for our lawyers to ask the judge to generate the conditions to be able to reach an accord that is beneficial and egalitarian for 100 percent of creditors,” Fernández de Kirchner said.

Meanwhile, the government took the country’s long-term legal battle with hedge funds to the international media as it published yesterday an advertisment in the Wall Street Journal titled “Argentina wants to pay its debts but they don’t let it.”

“The will of Argentina is clear: we expect a judicial decision that promotes fair and balanced negotiating conditions to resolve this protracted and difficult dispute that has affected, affects and will continue to affect the Argentine people due to the voracity of a minute group of speculators,” the advertisment says.

Argentina is due to make a coupon payment on its restructured debt June 30. US District Court Judge Thomas Griesa has ordered Argentina to pay all holders of its defaulted bonds, both those who have accepted a restructuring and those who haven’t. There is a 30-day grace period before another default can be declared should it choose to decline to pay the holdouts US$1.33 billion plus accrued interest.

The holdout investors, led by NML Capital Ltd, a unit of billionaire Paul Singer’s Elliott Management Corp, and Mark Brodsky’s Aurelius Capital Management specialize in distressed debt investing, have used their deep pockets to pursue a 13-year legal battle that’s now coming to a conclusion.

A source familiar with NML’s position said the firm accounts for between 45 and 50 percent of the payout ordered by Griesa, amounting to a potential payout of between US$598 million and US$665 million. Aurelius’s position is smaller, another source has told Reuters.

Open-minded

The NML source also said they would be open-minded to a mixture of cash and bonds in the settlement and if given the right circumstances may even accept less than the court award if all its other substantial court-awarded claims could be settled at once to finally put an end to the legal battle.

“It sounds like she wants to be able to find a way to pay and to negotiate with NML at the same time,” said one source familiar with NML’s views on the case.

“It gives incrementally more confidence, but the rubber hits the road once the parties are close as to what can get done,” the person said, referring to Fernández de Kirchner’s comments. “That will be the true test of whether this is real or fake.”

Some exchange bondholders say they don’t really care if holdout investors get a bigger payout from Argentina, but would oppose another proposal, swapping the debt for bonds under Argentine law.

“That would be completely unacceptable,” said Ruggero de’Rossi, head of emerging market fixed income at Federated Investors in Pittsburgh. The firm owns restructured New York law bonds.

De’Rossi said it would be a suicidal move if CFK’s administration chose the path of default.

“Really the only possible solution is that Argentina offers a cash amount to the holdouts plus an in-kind payment of bonds that they can issue, similar to what they did with Repsol,” he said.

It could also be that investors would be scared away from participating in any Argentine transactions, present or future, for fear of legal reprisal just when Buenos Aires faces a need to borrow money.

Bond payment

Next year the government has to make a US$6 billion payout to creditors holding its BODEN 2015 debt issue, which is governed by Argentine law.

Argentina lawmakers said that Economy Minister Axel Kicillof didn’t elaborate on the possibility of a debt swap in a briefing on Wednesday, suggesting the government was focusing its efforts on debt talks.

“Our impression is that the government will prioritize a negotiation, that is what they let us understand,” leftist opposition legislator Claudio Lozano said. “If the government wants to do a debt swap... it will have to send a law proposal to the congress.”

A scarcity of polls make it difficult to quantify public opinion on the issue, but analysts and ordinary Argentines say they are starting to favor making a deal even if the government insists that it would just spark new legal battles.

Many creditors held out from a 2005 exchange offer which paid between 25 and 29 cents on the dollar before more bondholders threw in the towel in 2010 on the same terms. The restructuring is generally recognized as being among the most onerous for sovereign creditors in history, although 93 percent of the bonds were restructured.

After the US Supreme Court rocked Argentina’s position on Monday, the government has waffled, saying it would sit down and negotiate and then called the holdouts extortionists who are making it impossible to pay everyone by June 30.

“Their first reaction was yes, their second reaction was no, but all of us have to be conscious that this is a difficult time for them and they are finding their way,” said Bruce Wolfson, a lawyer with Bingham McCutchen in New York.

“It is not unusual for any government in these circumstances to put out some initial statements that upon reflection end up not being policy and that is certainly something we have seen before in this case,” Wolfson told the EMTA conference.

It’s not that Argentina has proved unwilling or unable to negotiate with other parties to whom it owes money. Kicillof in recent months agreed a settlement with Spanish oil major Repsol, paying $5 billion, or 50 percent of what Repsol asked for, to compensate for Argentina’s seizure of its YPF subsidiary. He also negotiated a long-standing debt repayment plan with the Paris Club of sovereign creditors.

In the meantime, some bondholders have lost faith there might be a successful negotiation

Gramercy Funds Management, a Connecticut-based hedge fund that also mounted a legal fight to have Griesa’s order overturned, sold nearly all of its position in the restructured bonds earlier this year, a person familiar with firm’s position told Reuters.

Others just want the holdouts to be paid off.

‘We are in the business of investing based on fundamentals and holdouts are in the business of investing based on-13 year legal battles,‘ de’Rossi said.